Huntsman Corporation — Form 10-Q Summary
Period: Three months ended March 31, 2015. The filing identifies this as Q1 2015; the request metadata says 2014 Q1, which conflicts with the filing.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating through Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Huntsman International LLC is its wholly owned principal operating subsidiary. The unaudited interim results are not necessarily indicative of full-year performance. Unless specified, financial amounts below are Huntsman Corporation consolidated amounts in U.S. dollars.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $2.589 billion | $2.755 billion |
| Gross profit / gross margin | $450 million / 17.4% | $450 million / 16.3% |
| Operating income / operating margin | $77 million / 3.0% | $150 million / 5.4% |
| Net income attributable to Huntsman Corporation | $5 million | $54 million |
| Diluted earnings per share | $0.02 | $0.22 |
| EBITDA / adjusted EBITDA | $159 million / $285 million | $261 million / $329 million |
| Operating cash flow | $34 million | $(67) million |
| Capital expenditures | $149 million | $107 million |
At March 31, cash and cash equivalents were $994 million; current assets were $4.887 billion and current liabilities $2.474 billion, or working capital of $2.413 billion. Debt excluding affiliate debt was $5.358 billion, including $529 million classified as current; cash less that debt was approximately $4.364 billion net debt. The company reported $1.806 billion of combined cash, restricted cash and unused borrowing capacity. The $625 million revolving facility had no borrowings outstanding, and the A/R programs had $193 million of availability.
Financing cash flow was $189 million, including $326 million proceeds from issuing euro-denominated 4.25% senior notes due 2025. Investing cash flow was $(81) million and included a $66 million receipt from terminating cross-currency interest rate contracts. The company paid $31 million in common dividends ($0.125 per share).
Material changes versus the prior comparable period
- Revenue fell 6%, with lower volumes across all segments and lower local-currency selling prices in most segments; foreign-exchange translation also reduced reported results. Huntsman estimated a $17 million adverse EBITDA impact from currency movements year over year.
- Operating income fell 49% and attributable net income fell 91%. Restructuring, impairment and plant-closing costs increased to $93 million from $39 million; interest expense rose to $56 million from $48 million, primarily reflecting borrowing for the Rockwood acquisition.
- EBITDA declined 39%. Adjusted EBITDA, which excludes specified items including restructuring costs, declined to $285 million from $329 million.
- Segment EBITDA was $93 million in Polyurethanes (down from $158 million), $118 million in Performance Products (up from $92 million), $55 million in Advanced Materials (up from $41 million), $11 million in Textile Effects (up from $8 million), and $(75) million in Pigments and Additives (versus $13 million).
- Pigments and Additives revenue rose 80% to $572 million, principally reflecting the Rockwood businesses acquired in October 2014; the segment nevertheless reported a loss, with weaker margins and restructuring and integration costs. Polyurethanes revenue and EBITDA were affected by the scheduled Port Neches PO/MTBE maintenance outage.
- Operating cash flow improved from an outflow of $67 million to an inflow of $34 million, mainly due to a more favorable change in operating assets and liabilities. Capital expenditures increased 39%.
Outlook, management commentary, risks and unusual items
- Management said profitability in differentiated businesses continued to improve and cited strength in markets served and encouraging growth prospects. It described titanium dioxide market conditions as challenging, though Pigments and Additives earnings improved versus Q4 2014.
- Management expected 2015 capital expenditures, net of reimbursements, of approximately $625 million and a full-year adjusted effective tax rate around 30%.
- Expected segment drivers included strong U.S. MDI demand and improving MDI margins, but lower PO/MTBE margins; improving downstream margins in Performance Products; a strong aerospace market for Advanced Materials; and selective growth for Textile Effects. Management noted currency headwinds and lower oil prices reducing the U.S. Gulf Coast manufacturing advantage.
- The Port Neches maintenance outage was estimated to reduce first-half 2015 EBITDA by approximately $95 million, including lost revenue and unabsorbed fixed costs. Associated maintenance costs were expected to be about $90 million, with approximately $47 million paid by quarter-end; these costs were to be deferred and amortized over about five years.
- Pigments and Additives restructuring included plans to reduce approximately 900 positions, with expected annual savings exceeding $130 million by mid-2016. The Calais, France “black end” closure was expected to reduce European TiO2 capacity by about 13% and generate approximately $35 million in annual savings by mid-2016. The filing also cites approximately $140 million of Rockwood integration synergies.
- After quarter-end, on April 17, Huntsman used the 2025 notes’ proceeds to redeem $289 million principal of 8.625% subordinated notes. The redemption generated a $20 million early-extinguishment loss in Q2; $294 million had been classified as current debt at March 31.
- Arabian Amines, a consolidated 50%-owned joint venture, had $156 million outstanding and was not in compliance with certain loan covenants at quarter-end. It obtained a lender waiver on April 29; the company was assessing balance-sheet classification. Huntsman stated that this noncompliance did not affect its other debt obligations and that it did not guarantee those loans.
- Material contingencies include ongoing titanium dioxide antitrust litigation, for which the company could not estimate a loss range and recorded no accrual; and a customer product-delivery claim with current claims of approximately €113 million. Huntsman estimated its possible loss range for the latter at €0–€113 million and recorded no accrual, stating it believed insurance covered liability above $10 million.
- Environmental and regulatory exposures include $57 million of accrued environmental liabilities. The filing warns that remediation costs, changing environmental rules, foreign-exchange movements, commodity prices, and debt covenant or receivables-program events could affect results or liquidity.
Important facts for investors to verify
- Confirm the period: the filing is for Q1 2015, notwithstanding the request metadata’s Q1 2014 label.
- Review the drivers and sustainability of the steep decline in reported earnings and EBITDA, including the Port Neches outage, currency effects, and the distinction between GAAP and adjusted results.
- Track Pigments and Additives restructuring execution, costs, capacity changes, integration synergies, and whether stated savings are achieved.
- Assess liquidity and refinancing needs, including current debt classification, the post-quarter note redemption, borrowing availability, and restrictions on cash held by foreign subsidiaries.
- Monitor the Arabian Amines covenant waiver and the status of its debt classification, as well as the antitrust, product-delivery and environmental contingencies.